Barclays 2008 Annual Report Download - page 283

3
Financial statements
Barclays PLC Annual Report 2008 281
48 Market risk (continued)
Foreign exchange risk
The Group is exposed to two sources of foreign exchange risk.
(a) Transactional foreign currency exposure
Transactional foreign exchange exposures represent exposure on banking assets and liabilities, denominated in currencies other than the functional
currency of the transacting entity.
The Group’s risk management policies prevent the holding of significant open positions in foreign currencies outside the trading portfolio managed by
Barclays Capital which is monitored through DVaR.
There were no material net transactional foreign currency exposures outside the trading portfolio at either 31st December 2008 or 2007. Due to the low
level of non-trading exposures no reasonably possible change in foreign exchange rates would have a material effect on either the Group’s profit or
movements in equity for the year ended 31st December 2008 or 2007.
(b) Translational foreign exchange exposure
The Group’s translational foreign currency exposure arises from both its capital resources (including investments in subsidiaries and branches, intangible
assets, minority interests and debt capital) and risk weighted assets denominated in non-Sterling currencies. Changes in foreign exchange rates result in
changes in the Sterling equivalent value of non-Sterling denominated capital resources and risk weighted assets. As a result, the Group’s regulatory capital
ratios are sensitive to foreign exchange rate movements.
The Group’s hedge strategy is to minimise the volatility of all capital ratios whilst taking into account the impact on hedging of non-Sterling net
investments, the cost of hedging, the availability of a suitable foreign exchange market and prevailing foreign exchange rates.
To minimise volatility in the equity ratio, the Group aims over time to maintain the ratio of foreign currency equity capital resources to RWAs the same as
the Group’s equity ratio. To create equity capital resources denominated in non-Sterling currencies, the Group leaves some investments in core non-
Sterling subsidiaries and branches un-hedged. The resultant change in the Sterling value of the investments is captured in the currency translation
reserve, resulting in an equity capital movement.
Depending on the value of non-Sterling net investments, it may not always be possible to maintain the ratio, leaving some capital ratio sensitivity to
foreign exchange movements.
The proceeds from equity accounted foreign currency preference shares are also used in the equity ratio hedge. If a preference share is redeemed, the
cumulative movement in the currency translation reserve will be offset by an equal and opposite movement in other reserves reflecting the revaluation of
the preference shares to prevailing foreign exchange rates.
The exposure of Tier 1 and Total capital ratios is managed by issuing, where possible, debt capital in non-Sterling currencies such that the ratio of Tier 1
and total capital resources to risk weighted assets is the same as the Group’s Tier 1 and Total capital ratios. This is primarily achieved by the issuance of
debt capital from Barclays Bank PLC in major currencies, but can also be achieved by subsidiaries issuing capital in local currencies.
The carrying value of the Group’s foreign currency net investments in subsidiaries and branches and the foreign currency borrowings and derivatives used
to hedge them as at 31st December 2008 were as follows:
At 31st December 2008
Functional currency of the operation involved Structural
Foreign Borrowings Derivatives currency Remaining
currency which hedge which hedge exposures structural
net the net the net pre economic Economic currency
investments investments investments hedges hedges exposures
£m £m £m £m £m £m
United States Dollar 14,577 6,019 – 8,558 6,720 1,838
Euro 6,336 2,922 –3,414 3,125 289
Rand 3,725 – 1,306 2,419 164 2,255
Japanese Yen 5,009 801 4,212 (4) – (4)
Swiss Franc 3,042 2,936 101 5–5
Other 2,940 – 880 2,060 – 2,060
Total 35,629 12,678 6,499 16,452 10,009 6,443
At 31st December 2007
Functional currency of the operation involved Structural
Foreign Borrowings Derivatives currency Remaining
currency which hedge which hedge exposures structural
net the net the net pre economic Economic currency
investments investments investments hedges hedges exposures
£m £m £m £m £m £m
United States Dollar 3,273 1,000 – 2,273 3,575 (1,302)
Euro 3,690 1,506 – 2,184 2,387 (203)
Rand 3,205 – 2,599 606 165 441
Japanese Yen 2,986 180 2,773 33 – 33
Swiss Franc 2,140 – 2,131 9–9
Other 1,847 53 465 1,329 – 1,329
Total 17,141 2,739 7,968 6,434 6,127 307